By Rukmini Parthasarathy

He forgot the foundation. Three years into an economic slowdown, India Inc.'s last Budget before the New Millennium offers no answers-just assumptions. Of course, every Union Budget since 1996-97, the year industrial growth slipped sharply, has been predicated upon the assumption of a recovery. In that respect, UB 99 is no different. If Union Finance Minister Yashwant Sinha's numbers are to add up, the economy must recover to grow by 7 per cent in 1999-2000.

However, budgets cannot just presume (such) growth-they must also unveil a strategy to ensure it. Post-1991 budgets had consistently pinned their hopes on greater growth through economic reforms. Sinha's first full-fledged budget in 1998-a confused jumble of reforms, regression, and rollbacks-departed from that tradition. His second confirms that the first was no aberration.

Undoubtedly, UB 99 is a better-crafted, more consistent document. All the taxes add up (but for two), ensuring that, this time, there will be no embarrassing reversal. Better still, the resources mop-up is through across-the-board hikes, which leaves little room for the inevitable post-Budget pleas for sector specific modifications, sops, and exemptions. And postponing the task of announcing the second generation of reforms to yet another committee will minimise the strains of managing a restive, a raucous coalition.

None of this, however, amounts to a coherent growth strategy. Concurs Udayan Bose, 49, Chairman, Lazard Creditcapital: ''There is no growth model in UB 99.'' Any budget that is not driven by an underlying logic of liberalisation only rests on presumptions. BT identifies these implicit presumptions of UB 99, testing whether they can deliver the growth that Sinha blithely takes for granted.

The Budget Presumption: Fiscal Containment Is The Only Way To Achieve Growth.

Actually, the possibility of a fiscal blow-out looms large. Squeezed by falling revenue receipts and ballooning expenditure, borrowings skyrocketed in 1998-99. Shooting past the budgeted targets in the first 9 months of the year, the government's gross borrowing programme swelled to Rs 79,714 crore-a whopping 55.96 per cent increase. As a result, interest payments can be expected to consume at least 50 per cent of revenue receipts, which, in turn, will force the government to borrow more in 1999-2000. A steadily-deteriorating fiscal balance throws all macroeconomic variables out of kilter. It sucks in liquidity, intensifies upward pressures on interest and inflation rates, and drags down savings and investment growth.

To its credit, UB 99 attempts to break out of this vicious cycle. Indeed, fiscal consolidation is accorded top priority in Sinha's 6-point strategic agenda. Agrees S.L Rao, 63, Chairman, Central Electricity Regulatory Commission: ''Deficit-reduction has been made a strategic objective, conveying a clear sense of urgency on the fiscal situation.'' Already, monetary policy has factored in a possible fiscal improvement. Repurchase rates have been slashed by 200 basis points, the Cash Reserve Ratio has been trimmed by half a percentage point, and bank rates have been cut by 100 basis points-all signalling interest rate reductions. Estimates Surjit Bhalla, 49, President, Oxus Research: ''Every 100 basis point reduction in interest rates can pare the fiscal deficit by Rs 10,000 crore.''

Sure, Sinha has projected a sharp reduction in the fiscal deficit from 6.50 per cent of Gross Domestic Product (GDP) in 1998-99 to 4 per cent in 1999-2000. But, what is good for the Budget is not good for the economy. Much of this is a pure accounting gain since the GDP numbers have gone up because the base-year has been forwarded to 1993-94 while the deficit numbers have fallen because small savings collections have been excluded. Naturally, the ratio will head south. If the impact of the base-year revision is factored in, the fiscal correction shrinks to 0.50 percentage points. And if small savings collections are added back, the difference is further whittled down to 0.10 percentage points of GDP. In effect, Sinha has not budgeted for a fiscal correction at all. Period.

Worse, this zero-correction has been accomplished by across-the-board tax-hikes. Citing mounting fiscal stress, Sinha has slapped 5 new surcharges-2 on direct taxes and 3 on indirect taxes-to mop up an extra Rs 9,334 crore. Additional imposts, especially on the direct tax front, are unnecessary, since the Laffer Curve has served finance ministers well, albeit with a lag. Despite the slowdown, corporate profits and personal income-tax collections in 1998-99 were buoyant, surging by 35.20 per cent and 25.30 per cent, respectively. Clearly, the stunning tax-cuts effected by former Union finance minister P. Chidambaram paid off for his successor. Observes Bibek Debroy, 43, Director, Rajiv Gandhi Foundation for Contemporary Studies: ''The actual hike may be marginal, but the signal is hugely negative since this is the first time since 1991 that a finance minister has raised direct tax-rates in this country.''

As for indirect taxes, UB 99's estimates are optimistic. Subtract the Re 1-per-litre CESS on diesel, and excise collections are still expected to grow by 11.10 per cent. Even in 1995-96-a year of bumper industrial growth-excise collections rose by only 7.60 per cent. Sure, Sinha has trimmed the number of slabs and plugged exemptions, but it is unlikely that rationalisation and better compliance will garner Rs 5,900 crore more next year-especially if industrial growth remains sluggish. Points out B.B. Bhattacharya, 52, Head (Development Planning), Institute of Economic Growth: ''Last year, the assumptions about tax-collections went totally awry. This year, Sinha has once again assumed high rates of growth even though nothing has really changed.''

The unjustified ambition on the revenue account is matched only by an undue conservatism on the expenditure account. Sinha expects to spend just 10 per cent more-less than half the expenditure growth recorded in 1998-99. Sure, the pre-Budget reduction in the food, fertiliser, and cooking-gas subsidies will help rein in a burgeoning subsidy-bill, but the establishment costs of the Government Of India continue to bloat. Thanks to the Fifth Pay Commission, salaries and pension payments now consume close to a fifth of revenue receipts.

Even assuming that expenditure growth will be curbed within budgeted limits, the Centre's gross borrowing programme will still suck in a whopping Rs 83,571 crore. And that will crowd out private investment, and counter the monetary push towards lower interest rates.

The BT Reality Check: Fiscal consolidation is an essential pre-requisite for growth. But the quality of that adjustment matters. A fiscal adjustment that is short on expenditure economies and long on accounting adjustments and tax-increases will end up harming-not helping-recovery.

The Budget Presumption: Agricultural Growth And A Housing Boom Will Lead An Industrial Recovery.

Drooping demand growth has impeded industry's recovery from a slowdown that is now over 3 years old. While the growth-estimates for private consumption expenditure project a marginal rise of 3.80 per cent in 1998-99, investment spending does not fare better. Gross fixed capital formation will rise by only 5 per cent this year. Observes S.L. Shetty, 62, Director, EPW Research Foundation: ''UB 99 does nothing to tackle the fundamental problem with the industrial economy: the absence of effective demand.''

Any budget can directly impact spending in 3 ways: through disposable incomes, through prices, and through sentiment. UB 99 takes a larger bite out of corporate and household incomes, leaving less for spending on consumption and investment. ''Squeezing more resources from existing assessees will be counter-productive to demand-generation,'' says Rajat Kathuria, 35, Director, Telecom Regulatory Authority of India.

Instead of raising prices, the indirect tax-changes will also slice into profits. For instance, the hike in the average Customs duty rates of about 3 per cent; the CESS on diesel; and the earlier 4 per cent increase in Railway freight rates will inflate manufacturing costs. But, given the competitive scenario, the excess capacities in many industries, and the global deflationary pressures, corporates will be unable to pass on cost-increases to customers. Corporate results for the first 3 quarters of 1998-99 already indicate a 4 per cent decline in profitability.

UB 99 will further thin rapidly-shrinking margins. That decline will, ultimately, limit the effectiveness of any package for the capital markets, however smartly-crafted. Presented with an array of tax-sops for the sagging mutual funds industry and a reduction in the long-term capital-gains tax, sentiment has soared on the bourses. But the boom may be short-lived. Warns Sunil Bhandare, 57, Advisor, Tata Economic Services: ''The stockmarkets cannot continue to rise if profits continue to shrink.''

Of course, UB 99 is not totally devoid of demand-boosters. No budget speech is complete without announcing at least one new head of expenditure. Using his battery of new and renamed schemes for agricultural employment and welfare, Sinha has created several. No doubt, much of this largesse is aimed at the rural vote-bank, but, this time around, the money will, probably, be better-spent.

For starters, the funds will flow directly from the central exchequer to the gram panchayat, minimising the channels for leakages. Direct involvement of user-groups has proved to be the best way to increase the productivity of such schemes. Second, many of the grants are conditional. Disbursements to states will depend on their implementation of reforms. For instance, financial assistance will be available to states that carry out land reforms. And funds earmarked for the Accelerated Irrigation Benefit Programme will be provided only to states that rationalise their water rates.

As a result, the impact on farm output and demand-and, hence, on growth-could be substantial, especially in the long run. Bumper agricultural growth in 1998-99 will enable the economy to reap a 5.80 per cent growth-rate despite a wrenching industrial slowdown. In fact, without the boost provided by surging rural demand to Fast-Moving Consumer Goods, and two-wheeler and tractor industries, the manufacturing sector would have fared even worse than it has.

However, over the past few years, agricultural growth has been incredibly volatile, swinging from a high of 9.40 per cent in 1996-97 to a low of -1 per cent the following year. Explains Ashok Gulati, 45, NABARD Professor, Institute of Economic Growth: ''The volatility is directly correlated to the distribution of the monsoon. So, though this Budget provides more rhetoric than funds to agriculture, the thrust on water-management is a step in the right direction.''

Of course, rising rural incomes and demand won't provide much impetus to the basic and intermediate goods sectors, which have borne the brunt of an industrial slowdown. That is precisely why UB 99 attempts to provide a demand fillip to these industries through a series of fiscal incentives for housing. Given the powerful linkage effects with the rest of the economy, a housing boom could engineer a wide- ranging industrial rebound. Indeed, in advanced economies, housing often provides a starting-point-as well as the most telling indicator-of a revival.

However, fiscal concessions alone will not provide sufficient foundation for such a boom. While they may stimulate housing demand, a tangle of legal provisions-especially at the state-level-continues to block supply. Despite an ordinance empowering the states to abolish urban land ceilings, not a single state has implemented its provisions. And the progress towards overhauling our antiquated rent-control and tenancy laws is likely to be even slower-holding up the recovery.

The BT Reality Check: UB 99 will not stimulate sagging demand growth. Even if the thrust on agriculture and housing transforms these two sectors into powerful demand drivers, it will only be over the medium- to long-term.

The Budget Presumption: The Industrial Economy Can Be Left To Fend For Itself.

Industrial growth continues to decelerate. Between April and December, 1998, Foreign Direct Investment (FDI) inflows have contracted, falling by 38 per cent over the levels achieved last year. Non-food credit-flows have also been sluggish, with the first 9 months recording a smaller increase than the corresponding period of last year. Unsurprisingly, the manufacturing sector grew by a mere 3.70 per cent in the first 3 quarters of the year.

UB 99's response to a prolonged and protracted industrial slowdown: rationalisation of excise and Customs duties, fiscal incentives for corporate restructuring, sops for the small scale sector-and an announcement of the intention to expand the automatic approval list for FDI. Significantly, the big spending strategy of last year has been abandoned. Plan outlays are budgeted to grow by just 12.60 per cent, a steep fall from the ambitious 21.70 per cent Sinha had hoped for in 1998-99, which will, of course, ensure that the government does not lay claim to the mantle of customer. Complains Arun Firodia, 55, CEO, Kinetic Engineering: ''This Budget does nothing for an industrial revival.''

Take, for instance, the indirect tax rationalisation. The reduction in the number of slabs was long overdue and will, no doubt, reduce transaction costs and improve efficiency. Observes Subodh Bhargava, 57, Group Chairman & CEO, Eicher: ''This rationalisation spells the end of sector-specific tax policies. In the long run, that will force industry to look beyond narrow, sectoral issues.''

But a battery of surcharges accompanied the rationalisation, diluting the short-run gains. The excise duty structure will effectively have 6 slabs instead of the proposed 3, with the top rates remaining unchanged. Worse, even as Sinha proposes to abolish ad hoc excise duty exemptions, the number of concessions and sops offered to the small scale sector has mushroomed. Argues Indira Rajaraman, 51, RBI Professor, National Institute of Public Finance & Policy: ''The surcharges may not have been necessary if the various exemptions had been withdrawn.''

Worse, a policy regime based on protection through investment ceilings, reservation, and tax sops has muzzled productivity improvements and bred widespread industrial sickness among small scale enterprises. Merely directing an increase in the quantum of credit-flows to the sector is not going to spur investment. In fact, given the earlier lowering of the investment-ceiling from Rs 3 crore to Rs 1 crore, a larger allocation of subsidised credit will, probably, only increase the non-performing asset load on the banks.

On the Customs duty front, the signals are contradictory. With the peak rate coming down from 45 to 40 per cent, this may not, nominally, be a protectionist budget. But the average rates have gone up due to the rationalisation and the surcharge. So, despite Sinha's assurance that the tariff-rates will be lowered to Asian levels at some unspecified future date, the direction of future Customs duty changes is unclear. That makes investment planning by both foreign and domestic investors more difficult. It also handicaps exports.

UB 98 demonstrated that government spending does not fuel growth-only deficits. But the solution does not lie in slashing public investment. The problem has not been the size of government expenditure; the problem has been the return on government expenditure. UB 99 budgets for a lower growth in Plan outlay, but continues to expect the Public Sector Units (PSUS) to generate 57.50 per cent of these outlays through internal and extra budgetary resources.

Unless bureaucratic interference is minimised through a genuine disinvestment programme, the ability of the PSUS to generate these resources will be limited. Sinha has promised that much of the Rs 10,000 crore disinvestment target for 1999-2000 will be raised through strategic sales-as recommended by the Disinvestment Commission-and not by the elaborate maze of share-swaps, buy-backs, and global depository receipts that will help him mop up Rs 9,000 crore by the end of fiscal 1998. If that is the intent, then, surely, he could have speeded up the process by awarding statutory status to the Disinvestment Commission.

The BT Reality Check: The Budget cannot kickstart growth. However, it can provide an enabling environment. The sheer length of the industrial slowdown suggests not just a cyclical downswing, but serious structural rigidities. The only way the Budget can provide sustainable momentum is through bold reforms.

And yet, reforms have been relegated to yet another committee. The omission is intentional. Points out Jairam Ramesh, 44, Secretary, All India Congress Committee's Economic Affairs Department: ''The second generation of reforms will hinge on legislative consensus-not on executive action-and this government has repeatedly demonstrated its inability to craft legislative consensus on economic issues.'' Witness the repeated delays over the Insurance Bill, the Foreign Exchange Management Bill, and the Patents Bill. A minimalist agenda appears achievable. It also lowers expectations.

Irrespective of the Budget, however, the economy may have bottomed out. In fact, there are faint glimmers of a recovery. Non-oil imports are buoyant; exports have risen for the second month in a row albeit over a smaller base; and interest-rates have dropped. A growth-neutral budget will, at best, ensure that we continue to plod along. Unfortunately, the problem with lower expectations is that they tend to be self-fulfilling. That's the one kind of downsizing that the economiser in Sinha could not have had in mind.

Additional reporting by Gautam Chakravorthy Roshni Jayakar, Swati Kamal, & Dilip Maitra

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